Latest economic worries: Made in Korea

By Chris Isidore, senior writer


NEW YORK (CNNMoney.com) -- Another day, another international crisis rattles the world's financial markets.

This week, it's rising military tensions between North and South Korea that has investors worried. The sinking of a South Korean naval vessel in March, which has now been blamed on a North Korean submarine, has the two nations putting their military forces on alert and breaking off relations with one another.

South Korea is the world's 15th largest economy, larger than some of the European countries, such as Greece and Portugal, whose debt problems have spooked markets in recent weeks.

But it's not a fear of Korean debt default or disruption of trade between the two countries that helped spark a sell-off in stocks around the globe Monday and Tuesday. Instead it's an indication of the uncertain future of the global recovery sparking the sell-off in stocks from Asia to Wall Street.

Experts say that given the fragile nature of the still-nascent global economic recovery, we better get used to this kind of market reaction to fear and uncertainty. Far away events will affect the U.S. markets and economic outlook until there's more signs of sustained economic growth.

"The global economy is in such a fragile state right now that anything that happens keeps people on edge," said Tu Packard, senior economist at Moody's Economy.com.

Packard is hopeful that the Korean crisis and other looming international problems will be solved without toppling out of control.

"I think the policymakers recognize we're on the edge of the abyss and that they'll work together to try to move us from the abyss," she said.

But there are worries about the unpredictable nature of North Korean leader Kim Jong Il, said John Schmidt, senior economist for the Center for Economic and Policy Research, and worries about U.S. military commitments there. There are also fears about the difficulty of getting a coordinated global response to this and other looming crises.

"We're really expecting international economic policymakers to thread not just one needle but four or five needles," he said. "And it's not a unified group. It's very hard to get all the ducks in a row."

Beyond the human costs that would accompany the outbreak of fighting on the Korean peninsula, investors are worried about the economic disruptions it would cause, with supply chains being shutdown and trade across the region falling off sharply.

Most of the economic blow would be felt in Asia, the one region of the world that has been experiencing strong economic growth and helping to lead the recovery, said Jay Bryson, international economist for Wells Fargo Securities.

But Bryson said the real risk to the global economy from Korea is how it could add to a series of other problems around the globe, from the continued threat of Greek debt default and slide in the value of the euro to expanding problems in the Spanish banking system to growing worries about another drop in the U.S. home prices.

"When you have a number of shocks that hit at the same time and lay on top of each other, pretty soon the ripples they cause build into a tsunami," he said.

Because of the fears that the global economic recovery is on a tight rope, the sudden appearance of a crisis like Korea just reminds people about the risks of the next problem, such as a natural disaster or a disruption of the flow of oil.

"When you have as much fear as you have in the markets right now, it's often a small event that can focus people's mind," said Schmidt. To top of page

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